Renouncing U.S. Citizenship
The US government’s efforts to try and cut down on global tax evaders have prompted Americans abroad to rethink their US citizenship. Complicated IRS tax filings, disclosures and penalties for U.S. taxpayers around the world are driving increased inquiries. There are a number of prominent attorneys in Asia and other countries that have reported a sudden rise in Americans seeking to relinquish citizenship.
The number of renouncements has jumped to just over 1,000 people in the second half of 2013. This number is relatively small when you consider that there are over six million Americans living abroad. The relatively small increase is expected to climb in the next year as the new laws take effect on a broader scale.
The main reasons for this are FATCA and FBAR, which mandates that all foreign financial institutions report any financial assets held by US citizens (over $50,000) and that individuals report their financial assets separately to the U.S. Department of Treasury and in certain circumstances on their Federal 1040 filing.
This is a direct attempt by the United States government to catch anyone who may be trying to evade paying taxes. Over 50 countries are now gearing up to participate. Even the smallest of investment or financial assets owned by an American (FBAR: $10,000 and over) around the world requires a great deal of paperwork to report. Many foreign countries have recently passed caps on their tax rate, which is a big draw for Americans looking for tax safe havens and alternatives. Hong Kong, for instance, has passed a tax rate not to exceed 15 percent.
The U.S. government took recent action to impose hefty tax penalties of up to 40 percent of a person’s world-wide financial assets, and real estate. This is why this issue is so complicated for many U.S. citizens. The exit tax was created to discourage citizens who are thinking about relinquishing simply due to tax aversion.
Trouble On The Horizon
There is real trouble on the horizon for U.S. taxpayers who live abroad or who have foreign sourced income and/or offshore financial assets and choose not to disclose or comply with tax law – especially should they decide to forego their US citizenship. Anyone who was a US citizen and at the time of surrendering citizenship did not disclose all financial assets or income is still liable for all monies due the IRS including penalties, back taxes, past due accrued interest and even criminal charges.
When you calculate the possible tax penalties and charges then you realize that a person could loose on average between 50% to 75% or more of their non-disclosed financial assets, once they come forward. You have to decide if you want peace of mind from criminal prosecution (the U.S. Federal government has yet to lose a court case), stay an American and pay the government their due?